Can The EU Pact Offset Bearish Momentum?

The Europeans have "agreed to" another stability pact during another summit.
But like most of their recent summits, they were high on rhetoric and short
on details; they hope to have the details in place by March of next year.

As we noted on December
2, the entire concept of a new fiscal union, budget constraints, and
penalties addressing the pressing issues is somewhat misguided. Does it help
an over-indebted rule breaker to be hit with more liabilities in the form
of EU budget penalties? Will tacking on fines increase the confidence of
bond investors? How many "exceptions" do you think will be granted in the
next five years? How does a fiscal & stability pact impact Italy's ability
to refinance mountains of maturing debt in the next year? Many of these questions
remain unanswered. A Reuters
editorial does a good job summarizing what just took place in Europe.

The euro zone has agreed to take a big leap forward in economic integration,
but failed to deliver a convincing answer to investors worried about its
ability to tackle threatening debt crises in Italy and Spain.

One of the great things about looking at charts is "they are what they are
and they show what they show." When you examine the weekly chart below of
the S&P 500 going back to 2007, ask yourself "does this look like a bull
market or a bear market?" or "does this look like a strong market or a weak
market?".

The indicator (Williams %R) at the top of the chart measures momentum. Markets
need momentum to continue to trend higher. The green arrow shows the thrust
of momentum that occurred off the March 2009 low. Compare the area near the
green arrow to the present day; they do not look similar. The blue arrow shows
near market turning points, the slope of the 22-week moving average flattens
out and then turns up, which does not appear to be happening in the present
day. In fact, point A shows what can happen to market rallies that occur in
the context of a downward-sloping 22-week moving average. Market action near
point A and point B look similar; stocks did not perform well after point A.

Until (a) Williams %R shows an improvement in momentum, and (b) the slope
of the 22-week begins to flatten out/turn up, the odds will continue to favor
bearish outcomes. Could both (a) and (b) occur in the coming weeks? Sure, but
presently they do not point to sustained gains in risk assets. As we mentioned earlier
this week, the S&P 500 could make another push toward 1,285 to 1,340,
but knowing what we know today, the gains will most likely be given back within
a matter of weeks.

We continue to believe long-term investors face unfavorable odds owning stocks
and commodities (DBC). The S&P 500 (SPY) and NASDAQ (QQQ) will most likely
be lower in three months. Money printing by the Fed and/or ECB remains the
most significant bullish wildcard for investors. If they print, it can change
the market's dynamics. The Fed releases a statement on December 13, which
could be the push stocks need to make another run at the S&P 500's 200-day
moving average.

The video below, originally released on November 30, uses daily charts and
moving averages to address the bull/bear debate. As outlined in the video,
on a daily chart of the S&P 500 the following are in place:

Price is below the 200-day moving average, which is bearish.

The 50-day moving average is below the 200-day moving average, which is
bearish.

Chris Ciovacco is the Chief Investment Officer for Ciovacco
Capital Management, LLC. More on the web at www.ciovaccocapital.com.

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